Regulatory schemes break down mostly because the people being regulated are often the only ones who really understand their industry. Therefore the regulators end up being people who were either connected with the industry in the past, or hope to be again in the future.

This leads to the incestuous relationships we often see in the financial regulatory agencies. The industries often end up owning the regulators.

It has to be pointed out that the much intrusive Sarbanes-Oxley did nothing to protect investors from the Madoff and M F Global Holdings scandals.